Is Kyung Nong Corporation's (KRX:002100) Recent Performancer Underpinned By Weak Financials?

Kyung Nong (KRX:002100) has had a rough three months with its share price down 16%. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Particularly, we will be paying attention to Kyung Nong's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Kyung Nong

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Kyung Nong is:

3.6% = ₩7.9b ÷ ₩220b (Based on the trailing twelve months to June 2020).

The 'return' refers to a company's earnings over the last year. That means that for every ₩1 worth of shareholders' equity, the company generated ₩0.04 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Kyung Nong's Earnings Growth And 3.6% ROE

It is hard to argue that Kyung Nong's ROE is much good in and of itself. Not just that, even compared to the industry average of 8.4%, the company's ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 12% seen by Kyung Nong over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

However, when we compared Kyung Nong's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 3.6% in the same period. This is quite worrisome.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Kyung Nong fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Kyung Nong Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 63% (implying that 37% of the profits are retained), most of Kyung Nong's profits are being paid to shareholders, which explains the company's shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. To know the 4 risks we have identified for Kyung Nong visit our risks dashboard for free.

Additionally, Kyung Nong has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

Overall, we would be extremely cautious before making any decision on Kyung Nong. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Kyung Nong's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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